Question
Homework #8 (3 points) Use the following information to answer the questions below. Current cap. structure Proposed cap. structure Assets $15 million $15 million Debt
Homework #8 (3 points) Use the following information to answer the questions below. Current cap. structure Proposed cap. structure Assets $15 million $15 million Debt $0 $6 million Equity $15 million $9 million Share price $25.00 $22.50 Shares outstanding 600,000 ??? Bond coupon rate N/A 8% Assume that there are no taxes. EBIT is expected to be $2.5 million, but could be as high as $3.5 million if an economic expansion occurs, or as low as $2 million if a recession occurs. All values are market values. 1. How many shares are outstanding under the proposed capital structure? 2. What is the expected EPS under the current capital structure if there is a recession? 3. What is ROE for the proposed capital structure if the expected state occurs? 4. Which of the following is the correct calculation to find EBIT*, the breakeven EBIT for these two capital structures? A) EBIT*/400,000 = [EBIT*-($6,000,000x.08)]/600,000 B) [EBIT*-($6,000,000x.08)]/600,000 = EBIT*/400,000 C) EBIT*/600,000 = [EBIT*-($6,000,000x.08)]/400,000 D) [EBIT*-($9,000,000x.08)]/600,000 = EBIT*/400,000
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